Intercompany current accounts: frequent group payments can become loans without anyone signing a new facility

Groups often use intercompany current accounts to record frequent payments, recharges and temporary funding between related companies. The balance can move from receivable to payable during the month, but a large amount that remains outstanding for a long period can become economically similar to a loan and needs more deliberate pricing and documentation.

Use the account to record genuine cross-entity transactions

If Parent Ltd pays a supplier invoice for Subsidiary A, the parent can debit an intercompany receivable while the subsidiary records a matching payable. Service recharges, central payroll or tax payments can create similar balances.

The current account explains why cash and expenses sit in different legal entities. It should not be used as a miscellaneous dumping ground for unexplained group entries.

Both entities should record the same transaction

Use common references, value dates and currency so one side of the group does not record a loan while the other records a capital contribution or expense.

Monthly confirmations are valuable for material balances. Consolidation entries can eliminate differences at group level while the statutory company accounts remain wrong.

Decide when a running balance requires interest

Short operational balances can be treated differently from structural funding that remains outstanding for months or years. HMRC's cash-pooling and intra-group finance guidance emphasises analysing actual duration, functions and risks.

Transfer-pricing rules can require an arm's-length return where applicable. A company consistently funding another group member for free should not assume the absence of a formal loan agreement removes the financing issue.

Set periodic settlement rules

Groups can settle balances weekly, monthly or when they exceed a threshold. Regular settlement prevents one subsidiary from becoming an accidental long-term lender.

If cash settlement is inefficient, management can formally convert the balance into a term intercompany loan with documented maturity and interest.

Track the currency that creates the balance

A sterling parent paying a euro invoice for a subsidiary can create FX differences between payment date and intercompany settlement. Record the balance in the agreed currency and apply the accounting policy consistently.

Do not let small FX differences accumulate in suspense. They can become material across thousands of group transactions.

Review large or aged balances at board level

Directors should understand whether an intercompany receivable is collectible and whether paying it would leave the debtor company solvent. Group ownership does not guarantee repayment capacity.

Flag balances affected by acquisitions, disposals or insolvency risk. Selling a subsidiary with a large current-account balance can change the equity value and completion cash materially.

Worked example: Parent Ltd pays £300,000 of marketing and IT costs for Subsidiary B during the quarter, while B pays £100,000 of group insurance on behalf of the parent. The net current account is £200,000 due from B to Parent Ltd, supported by the individual transactions rather than one unexplained journal.

Use ageing even for intercompany receivables. A balance outstanding for twelve months should trigger a decision on settlement, term-loan documentation, capital contribution or impairment assessment.

When one company leaves the group, settle or document the current account before completion. Otherwise buyer and seller can dispute whether the balance belongs in debt, working capital or purchase price.

Set a threshold at which a running current-account balance must be reviewed as formal financing. For example, a group can require any balance above £500,000 or outstanding longer than 90 days to be documented as a term loan, settled in cash or approved by tax and treasury. This prevents temporary payment-on-behalf activity from turning silently into permanent funding.

Worked example: Subsidiary C receives central IT, insurance and payroll services throughout the year and ends with a £1.4 million payable to Parent Ltd. If C cannot settle and the balance is expected to remain for another two years, the group should decide whether that amount is really a loan and whether arm's-length interest should apply rather than leaving it indefinitely in a generic current account.

Use automated intercompany matching where transaction volume is high. Common invoice numbers, entity codes and currencies can allow the two sides to match before month end, leaving finance to investigate true exceptions instead of comparing entire ledgers manually.

Review balances before dividends or capital movements. A subsidiary that owes the parent a large current-account amount can have a very different net funding position from one whose cash balance looks healthy in isolation.

Keep board or treasury approval for material write-offs. If one group company cannot repay, clearing the balance is not ordinary reconciliation. It can create tax, accounting and creditor consequences and should be treated as a formal financing decision.